28 May 2018
Asia week ahead: Not much on the way to stem market sell-off

An intensified emerging markets sell-off will keep Asian financial assets under pressure and there is little the region's central banks can do about it

India: FY18 probably ended on a weak note

India’s GDP data for the final quarter of FY18 (ended in March 2018) is due on 31 May. The main positive for GDP growth in that quarter was the low base, while monthly indicators point no significant leap from the 7.2% year on year pace recorded in the previous quarter. Slower exports and wider trade deficit will drag GDP growth, while inflation accelerated above 5% to weigh down consumer spending.

However, slightly better industrial production growth informs the same about GDP growth, still supporting the consensus of a 7.3% GDP growth in the last quarter, though not enough to resuscitate investor confidence in the Indian rupee (INR). 

The 5% year-to-date INR depreciation against the USD is the most among Asian currencies this year. Unlike its Turkish counterpart, the Indian central bank has no history of thrashing policy measures, as markets set their eyes on the Reserve bank of India (RBI) policy meeting in early June. The recent market rout makes the next RBI decision as good as a coin toss.

Philippines: Central bank move will hurt the peso

The central bank, BSP, has cut banks’ reserve requirement ratio (RRR) for a second time in three months by another percentage point, effective 1 June. This is negative for the peso

Liquidity in the near-term would be high and would be a negative for the peso

We attribute the very recent underperformance of the Philippine peso to expectations of higher liquidity in the system. The increased liquidity is not only because of the large P130bn maturity of local government currency bonds and the reduction of the weekly BSP term deposit auction by P10bn but also the cut in the bank reserve requirement ratio (RRR) by one percentage point. The RRR cut is equivalent to P90bn of liquidity. The cut in RRR is the second this year (after one in March).  Liquidity in the next few days will be high and work against the peso unless BSP directly intervenes in the spot market or external developments turn more friendly to emerging markets. The market now expects the government to announce a retail treasury bond (RTB) offering that would in effect refinance the P130bn FXTN maturity. BSP targets to bring the RRR to below 10% in five years. The move is part of BSP’s operational adjustment that would bring the RRR near Asian norms. Unfortunately, the short-term liquidity would be negative for the peso. There is also a longer-term impact on the currency. Banks will likely use part of the liquidity to finance corporate and government activity resulting in enhanced growth prospects for the economy. Higher growth also means higher imports and wider trade deficits.

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Good MornING Asia - 28 May 2018

An intensified emerging markets sell-off will keep Asian financial assets under pressure and there is little the region's central banks can do about it

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